The Workday stock price suffered a big reversal in the extended session as the company’s forward guidance came short of expectations. WDAY dropped to a low of $253.62, down by 8% from its highest point this month. This article reviews its business performance and whether it is safe to buy the dip.
Workday forward guidance disappoints
Workday stock price crashed as investors scrutinized whether its investment in artificial intelligence tools is paying off.
This happened after the company’s results showed that its business did well in the first quarter, but warned that its growth would moderate.
The results showed that its total revenue rose by 12.6% in Q1 to $2.24 billion, while its subscription figures jumped by 13.4% to $2.058 billion.
Workday’s subscription revenue backlog jumped by 19% to $24.1 billion. However, the operating margin narrowed by 144 basis points to 1.8% to 30.2%.
These numbers were slightly better than what Wall Street analysts were expecting. However, the forward guidance showed that the company’s subscription revenue for the second quarter will come in at $2.16 billion.
These investors were anticipating a better performance because of its recent investments in AI. For example, the company introduced Illuminate Agents that are helping companies simplify their hiring.
It also integrated with Evisort’s AI contract intelligence and contract lifecycle management solutions.
Workday and other software companies like Zoom Communication, Salesforce, and ServiceNow have all invested heavily in incorporating AI tools in their businesses. Many of them fear that AI-focused companies could disrupt their businesses.
Workday’s biggest vulnerability is its human resource business, which this disruption could impact. For example, some companies like Eightfold AI have come up with tools to help in talent acquisition, talent management, and other resource management. Other companies seeking to disrupt the industry are Gloat, Aisera, Legion, and Simpplr.
Is WDAY stock overvalued?
Workday expects that its second-quarter revenue will be $2.34 billion, while its operating margin will be about 28%.
It expects that its annual revenue will rise by 12% to $9.5 billion and its cash flow will increase by 12% to $2.7 billion.
The company has recently announced layoffs of about 8.5% of its workforce to save on costs. It has also continued to repurchase its stock in a bid to boost its earnings per share (EPS).
A key concern among investors has always been about Wokday’s valuation. It has a GAAP P/E ratio of 91 and a non-GAAP multiple of about 31%.
The rule-of-40 is usually the best approach to value SaaS companies as it measures their growth and profitability. In Workday’s case, it has a revenue growth of about 12% and a net income margin of almost 10%. This gives it a rule-of-40 metric of 22.
Workday also has a levered free cash flow margin of 25%, meaning that the rule of 40 metric in this case is 37%. This figure also shows that the company is overvalued. However, in many cases, SaaS companies can remain overvalued for a long time.
Workday stock price technical analysis
The daily chart shows that the WDAY share price has been in a strong bullish trend in the past few months. It moved from a low of $205.50 in April to a high of $275.93 on Monday.
It then made a big down-gap to $253 after its earnings as concerns about its growth continued.
The most likely scenario is where the stock consolidates at around $250 and then it bounces back ahead of the next quarterly results. This could push it back to $275 in the next few months.
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